Materiality: Not Just for Sustainability Anymore

March 1, 2019

 

The GRI and KPMG have really mucked things up.

 

They’ve taken what should be a really useful, innovative, and game-changing exercise and made it cookie cutter, boring, and pedestrian. Even the sheer mention inspires dread from management teams and yawns from sustainability pros. I’m talking here about materiality.

 

There are three schools of thought when it comes to materiality.

  • “Materiality…what’s that?”

  • “Materiality…that thing where I get all my suppliers in a room and confuse them.”

  • “Materiality? Oh, you mean risk management.”

For the uninitiated, materiality is an exercise sustainability professionals often use to gauge critical issues impacting a business. It’s different than a SWOT analysis because it gathers insights from both internal and external stakeholders, as well as factors from changes in a given industry or market. Ultimately, it helps identify for a business what its most material issues are. Hence, materiality.

 

The exercise has been the exclusive purview of sustainability for years. This is primarily owing to the fact that materiality serves as the basis for GRI sustainability reporting, as well it should. Without a clear understanding of what’s important to a business, how are you going to address anything? The problem is that materiality has gone from insightful to an exercise in ticking boxes.

 

Here’s how it normally goes.

 

Come January, a company’s CSR committee will gather and realize it’s time to review its material issues. This is because they have to produce their annual sustainability report and without materiality it won’t be credible. They’ll often bring in one of the big guns, like KPMG, to run the process. Even worse, they may try to do it themselves.

 

The company will take its list of issues (often the same one they’ve been using for years), send out a survey to all staff (even those with little understanding or educated opinion on the issues) and then bring together a bunch of suppliers for a stakeholder engagement day. Here, they’ll gather the views of people who only tangentially understand the business. Once this is all done, they plug in their findings and spit out a new map. Wham, bam, boom. Materiality. Done!

 

What’s wrong here?

  • Firstly, these sorts of exercises aren’t taking into account the latest issues facing an organization. With the speed of business today, holding on to a year’s old list of material issues isn’t useful for anyone.  

  • Second, the insights are not insightful at all. It’s far better to have the educated viewpoints of 15 stakeholders than the wild opinions of 300.

  • Lastly, when done internally these processes lack credibility. Imagine you’re being interviewed by your manager on how well the company is performing versus a particular issue. Your answers are already going to be skewed towards the positive.

For that company from the third school of thought, though, materiality is vastly different.

 

Instead of looking at materiality as a ticking-boxes exercise, these companies realize the strategic value of the process from a risk management, operational, and programmatic point of view. They have evolved out of looking at materiality as just a sustainability practice. Sure, sustainability still forms part of the process. Now, though, savvy companies understand issues like energy efficiency, human capital development, and stakeholder engagement are really operational and central to how a business functions.

 

Fulcrum has just finished an engagement with a company holding this third school of thought. A few key differences stood out.

  • They understood doing materiality in-house was the wrong answer. Not only would it take credibility, but they knew they lacked the expertise to do it the right way.

  • The process was led by the executives, rather than managers or an ad hoc committee. This signalled to all the importance placed on materiality as a strategic imperative to the business. It also made the process of getting stakeholder opinions much easier.

  • Materiality did not equate to just sustainability. Leaders understood that while sustainability was the undercurrent of the exercise, there were many tangential benefits of engaging in materiality.

By looking at materiality strategically, instead of falling prey to the KPMG/GRI snooze fest the practice has become, this client has had the benefit of insights they can immediately execute company wide. In the next few months, we have estimated potential positive impacts well outside just the generation of a sustainability report. These include with public relations, brand differentiation, internal innovation and standard operating procedures, all of which will put this business on a stronger competitive footing.

 

That is, and should always be, the power of materiality. 

 

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